Eon: ‘Tread carefully’ on wholesale market reform

Eon UK chief executive Michael Lewis has told Utility Week he backs reform of the wholesale electricity market but has warned the process is “not straightforward”.

The government is said to be weeks away from brining forward proposals to decouple the price of electricity from the cost of gas.

While little detail has emerged about the extent of the proposed wholesale market reforms, the Department for Business, Energy and Industrial Strategy (BEIS) has said they will be a key part of its energy security strategy. The framework for the strategy produced in April pledged a review of electricity market arrangements.

A commitment to wholesale market reform, to tackle arrangements that are currently not reflective of the rapidly falling costs of renewable generation, is a key ask of Utility Week’s recent Energy Reset report, produced in association with PA Consulting.

Interviewed for the report, Lewis stressed the need for reform but caveated it could not be rushed and needed to balance security of supply and decarbonisation.

He said: “If the marginal price is set by an ever-diminishing amount of gas, you are going.to end up in a situation where a very large amount of the wholesale cost is attributable only to a small amount of marginal plant, with generator companies earning a supernormal profit. And that’s what we’re seeing at the moment. We have to try and reform that system so that it reflects better the actual cost of generation rather than just the marginal cost of the marginal generator.”

But he cautioned: “We have to tread carefully. Designing a system that works well, keeps the light on, incentivises people to build and maintain plants is not straightforward. The government’s Review of Electricity Market Arrangements must address this issue so we design the right framework for delivering a zero carbon electricity system for 2035.”

The company’s director of strategy, Jose Davila, agreed, telling Utility Week: “I don’t think there are quick and easy answers on the wholesale reform. But it’s great to see it in the energy security strategy. At the moment, the energy market is still designed in the way it was when I joined the industry in 1991. There have been a number of changes and previous attempts at market reform but that philosophy still remains. There’s a few dozen large dispatchable power stations. That power goes out on demand and the consumer flips the switch at the end of the transmission and distribution network, and the light comes on. It’s still that design philosophy, but that is just not going to work for a net-zero transition.”

To read more on our recommendations for wholesale market reform and for the views of Octopus Energy’s Rachel Fletcher, MP John Penrose and academics Michael Grubb and Jeff Hardy among others, download the report for free here.